'Safe haven' of investing in gold isn't always safe

Although gold is a hard asset and can't become worthless, it falls out of favor among investors when they become more optimistic and can earn dividends and interest in a wide range of stocks and bonds.

Psychology will influence the price of gold. If investors see governments struggle unsuccessfully to stabilize the financial system and reverse the recession, there could be another move into gold for safety. And if inflation expectations pick up, the gold rally could re-emerge.

“Governments are committing themselves to high levels of public expenditure and taking on risky assets from the private sector, while tax revenues collapse and public debt reaches record levels,” said Merrill Lynch commodity strategist Francisco Blanch. As a result “sovereign bonds are increasingly being seen as risky assets even in developed markets” and emerging market currencies “are showing a high probability” of depreciating.

Still, that doesn't mean savvy investors will flee entirely into gold as a haven. Rather, professionals tend to put small amounts of money into gold when they want a buffer in rough times. For example, William Bengen, an El Cajon financial planner, has about 3 percent of clients' portfolios invested in the SPDR Gold Trust exchange-traded fund (GLD). Most of their money, however, is in bonds backed by the U.S. government – investments that earn interest.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Contact her at
gmarksjarvis@tribune.com
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